New Paper Looks at the IMF Program in Argentina: Is It Helping?

Washington, DC ― A new paper from the Center for Economic and Policy Research (CEPR) examines Argentina’s IMF program that was approved in June, and revised in October, and finds danger signals ahead. The paper, by economist and CEPR Co-Director Mark Weisbrot and economist Lara Merling, finds that IMF plans to “restore market confidence” based on fiscal and monetary austerity are unlikely to succeed.

“In October, the IMF and the Argentine government decided to double down on deficit reduction and tighter monetary policy ― after the economy did vastly worse than they had forecast in June,” said Weisbrot. “But maybe they should take another look at what went wrong.”

The IMF, after reaching a $50 billion loan agreement with Argentina in the midst of a financial crisis in June, predicted that the economy would recover quickly and show positive growth (0.4 percent) for this year and next (1.5 percent). Four months later, the Fund forecast negative growth of 2.8 percent for 2018 and negative 1.7 percent for next year. The forecast errors for both years were very large, at 3.2 percent of GDP.

Forecasts for inflation, interest rates, and the debt-to-GDP ratio have been similarly revised to reflect a much worse situation ahead.

“The problem is that ‘expansionary austerity’ doesn’t work,” Weisbrot said. “The IMF program is centered around ‘building market confidence,’ but recessions do not generally build such confidence. And there is no disagreement that the policies that Argentina is implementing under the program are shrinking the economy.”

The IMF now expects the economy to begin recovery in the second quarter of next year, but the authors find that this may again be over-optimistic. The recovery next year is based completely on the growth of net exports, according to the IMF forecast; but the authors note that there are many downside risks to the global economy at present, including the Fed’s continuing interest rate hikes, trade frictions between the US and China, and financial market volatility.

The Stand-By Arrangement and the October review both emphasize that one of the principal objectives of the program is to “protect Argentina’s most vulnerable citizens from the burden of this needed policy recalibration.”

But the authors argue:

given the loss of revenues during the recession and the pressure for expenditure cuts to meet the program’s primary budget targets, this is almost certainly not going to happen. There will be increased suffering and hardship for millions of Argentines as unemployment and poverty increase with the recession. If the government sticks to the program targets ― or intensifies them, as in October ― there is a risk of prolonged recession …

the government made a number of mistakes that contributed to the crisis. The first was the rapid pileup of foreign currency debt, which increased from 35 percent of GDP in January of 2016, a month after President Macri took office, to over 60 percent of GDP in April of this year, just before the financial crisis exploded. Then, when the crisis hit, the government spent about $16 billion trying to prop up the peso, which lost about 52.3 percent of its value against the dollar by September 28.

Weisbrot noted that the IMF, with timely intervention, could have played a supportive role as a lender of last resort to Argentina as it faced a financial crisis in May.

“But by trying to reduce inflation and the current account deficit by shrinking the economy, the IMF agreement has introduced a whole new set of risks, imbalances, and hardships,” Weisbrot said.